Where was BoU when cracks were emerging at Crane Bank?

Wednesday February 22 2017

An illustration of how Crane bank operations

An illustration of how Crane bank operations collapsed. 

By Mark Keith Muhumuza & Jonathan Adengo

Kampala : At the end of 2013, cracks were revealed in the operations of Crane Bank when it was exposed to large bad debt book. It had also made provisions for those debts, the highest ever for the bank at the time.
It all seemed to be normal operation for the bank at least until Mr A.R. Kalan, the managing director Crane Bank who had been in that role for about 15 years left the bank unceremoniously. He had taken leave at the time, according to what Crane Bank directors at the time said.
However, the rumour mill and speculation was brutal, insisting that Mr Kalan was on the run for using his knowledge to siphon money from the bank. Mr Kalan has not been seen since then. And Crane Bank had also never appointed a substantive managing director since then.
Daily Monitor has seen documents of a resolution made by three of the eleven Crane Bank directors on July 3, 2014.
At that meeting, Mr Joseph Biribwona, Mr Sudhir Ruparelia, and Mr Alex Rezida approved to grant an extension to the leave request made by Mr Kalan.
“The request made by the managing director Mr A.R. Kalan for an extension of his leave to September 1, 2014 on health grounds afflicting his family be granted,” reads, in part, a resolution by the directors at the time. Mr P.K Gupta was then appointed as the acting managing director. As at October 20, 2016, Mr Gupta had not been confirmed managing director.
The cracks began to emerge after Mr Kalan departed. He had become a driving force in the bank. He was responsible for strategy and also recruitment of staff, especially those from India. Through Placewell HRD Consultants, an India-based recruitment firm, several branch managers, and senior level management were hired. There seemed to be a preference for Indian nationals for the management jobs at the bank.
Crane Bank has always been some sort of an enigma. Its expansion was rapid as it was looking at an ambition of being Uganda’s largest bank, overtaking the likes of Stanbic and Standard Chartered Bank. That progress was stopped in its tracks by Bank of Uganda (BoU), when it took over the bank on October 20, 2016. BoU’s action came almost seven months after speculation of Crane Bank’s ugly future started to emerge.

The case of vanishing capital
At the time BoU took over Crane Bank, there was confirmation that the bank had been significantly undercapitalised. “Crane Bank has been on the BoU watch list since September 2015 after regular onsite tests and external audit report. Crane Bank capital had fallen below the 50 per cent legal requirement under the law,” Prof. Emmanuel Tumusiime-Mutebile, the BoU Governor told reporters at the time. That stress test in 2015 was before Crane Bank published its financial statements for the end of December 2015.

In the financial statements reflecting the status of the bank at the end of December 2015, there were no signs that it was facing capital problems. In fact in the annual report of the bank, Mr Moses Biribwonwa indicated how they were way 8.4 times above the minimum requirements.

“Capital adequacy stands at 16.41per cent and core capital ratio stands at 15.74 per cent. Crane Bank’s paid up capital stands at Shs210 billion as against the BoU requirements of Shs25 billion,” he said. This is also emphasised in the annual report.

According to the Financial Institutions Act (FIA), 2004, commercial banks must maintain a minimum 8 per cent of capital as a ratio to the risk weighted. It is also required to have capital of no less than 8 per cent of total deposits. The total capital of the bank is not to fall to below 12 per cent of risk-weighted assets. In its financial statements, Crane Bank seemed to operate above all these benchmarks. In calculating the assets where the risk is weighed, commercial banks have to consider loans, government securities, cash and balances with BoU, investments and physical structures such as buildings.

Crane Bank also states that there was no single borrower the bank was exposed to in terms of capital by 25 per cent. As BoU would later come to reveal, Crane Bank may have been exposed to at least five to six clients that had in excess of Shs300 billion as non-performing loans (NPLs).

So what did BoU notice that was not revealed in the Crane Bank financial statements?
In order to avoid a run on the bank from the public, BoU doesn’t disclose the financial state of the bank at the time a stress test is conducted. Reporters had been told that the onsite test was carried out in September 2015. That is when the undercapitalisation was discovered. However, that was not reflected in the Crane Bank financials at the end of 2015.
According to Ms Christine Alupo, the director communications at BoU, “The accounts published in May 2016 relate to the period ending December 2015. The massive NPLs were discovered in an onsite examination conducted after May 2016.”

Bad loans?
Crane Bank was one of the 24 commercial banks in Uganda that happened to have been exposed this much to borrowers that it ended up eroding their capital. It, indeed, had the largest NPLs in 2015 standing at Shs145 billion. It had made provisions for loans that it had failed to recover of Shs50 billion. This money is often taken from the income of the bank to provide for those bad loans. The provision completely wiped out Crane Bank’s income. That would not have been a problem because Standard Chartered Bank and dfcu Bank also had a large loan exposure portfolio but they survived.

Writing for Daily Monitor recently, Mr Robert Kirunda, a lawyer in Kampala asked the same questions this newspaper has been trying to get answers to.
“But is this all there was to the nexus between capital erosion and the fall of the once 4th largest bank by deposits? Were loans really the bank’s main purpose? Was this the unluckiest bank whose customers all failed to honour obligations at the same time or is there more than is told of these lending practices and the larger business of this bank? What about all those highly priced fixed deposits? Where has all this money gone? Only Bank of Uganda can confirm the ultimate figure. What we all know, for sure, is that a lot of taxpayer’s money has been injected to keep the doors open,” he wrote. To date, all BoU can provide is one answer: NPLs were to blame.

“The inventory of assets and liabilities conducted by PricewaterhouseCoopers (PWC) confirmed Bank of Uganda’s position that erosion of capital was caused by non-performing loans,” Ms Alupo pointed out to Daily Monitor.
There is a number in the Crane Bank financials of 2015 that indicates they were not providing sufficient provisions for the bad debt. Crane Bank had over the years had a positive figure when it came to falling in line with the regulatory requirements on regulatory credit risk reserves. As at end of 2015, Crane Bank had fallen below the required provisions by about Shs41 billion. That meant that the bank should have made provisions for bad debts of about Shs100 billion in December 2015, instead of a mere Shs50 billion.

Audit efforts
BoU is expected to complete a forensic audit on Crane Bank at the end of this month. This audit, according to the regulator, will show exactly why there was massive capital erosion and who would be culpable. In other words, BoU is stating that there are other contributory factors to the rise in NPLs - perhaps not through ‘normal’ practices. A forensic audit establishes whether matters such as fraud, collusion and insider lending, among others, were to blame for the bank failure. In this case, BoU is looking at possible criminal prosecution for the previous shareholders and managers of Crane Bank.

Is it possible that practices that brought down the ‘big’ bank may have been existent for just one year? BoU insists that, as regulator, they played their part and stepped in to avert a crisis.
“BoU does not manage the affairs of financial institutions - that is the task of the management of that institution. Our task is to regulate and supervise them by providing the rules and enforcing compliance with the law and regulations. This is monitored onsite and offsite. When issues are discovered during the process of supervision, a defined course of action is taken,” Ms Alupo says.

Bank of Uganda speaks

Ms Christine Alupo, the director of communications at BoU, points out that by the time Crane Bank was taken over, all options had been exhausted. “In fact, the law spells out the processes and timelines for prompt corrective action depending on the nature of the issue. That is why financial institutions are given the opportunity within specific timelines to resolve issues that have been identified. So when you see a central bank going to the extent of affecting a statutory takeover of an institution, it is a sign that all preliminary stages have been exhausted, and that the continued existence of the institutions in its current state poses a risk to our core objectives of safeguarding depositors’ funds and maintaining the stability of the financial system,” she adds.

The future of the sector

Just like a pack of cards, Crane Bank collapsed but what remains unanswered is whether its long-term practices on governance and lending had been seen by the regulator and not taken on at an earlier stage. The answer lies in the future. To date, BoU takes pride in ensuring Crane Bank did not lead to a domino-like effect in the entire banking sector in the country.

Audit history: Did best auditors fail?

Bank of Uganda (BoU) hired PWC to conduct an inventory of the bank assets when it took over. Over the years, though, Crane Bank has had access to what is considered to be the largest audit firms in the country - PWC, Deloitte & KPMG. In fact, between 2004 and 2016, Crane Bank retained the big three as its auditors. If there was anything abnormal, the auditors did not seem to find it - at least not in the available public documents. When BoU took it over, they seemed to uncover the state of non-performing loans and what could have gone wrong at the bank.